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Stephanie Kelton is part of a new generation of economists trying to figure out how things work in our grim, new world.

It’s understandable that non-orthodox economists like Stephanie Kelton are coming to the fore. With a few notable exceptions, conventional economists failed to anticipate the 2008 financial meltdown and the subsequent Great Recession. New answers are being sought, writes Thomas Walkom. (Tom Williams / Associated Press file photo)

Parties may disagree on timing. But there is a consensus that, in general, government deficits are to be avoided.

Which is what makes Stephanie Kelton so interesting. She is chief economist for the Democratic minority on the U.S. Senate budget committee. That’s an influential post.

But she’s also a prolific advocate for a newish school of economic thought — sometimes called modern monetary theory — that is remarkably blasé about debt and deficit.

She’ll be in Toronto Friday to take part in a Canadian Economics Association panel discussion. I talked to her Wednesday. What follows is based on our conversation

Modern monetary theorists trace their roots back to John Maynard Keynes and his efforts, as well as those of like-minded economists in the 1930s and ’40s, to understand the complex relationship between monetary policy (banking) and fiscal policy (taxes and government spending.).

Kelton begins with two simple propositions. The first is that money evolved over time not to facilitate trade but to enable taxation. Political authorities issued money so that their subjects would be able to return some of it in the form of taxes.

One implication from this is that governments must spend first to put this money into the real economy. Only then can borrowing or tax collection take place.

Another is that while countries like Greece that use common currencies can go bankrupt, nations like Canada that maintain sovereign currencies cannot.

Kelton is not fond of the term “printing money” but that in effect is what she means: Nations that issue their own flexible currencies can, if they get into trouble, simply issue more.

Kelton has an argument about why that won’t lead to inflation, which I’ll come to later.

Her second proposition is that if government is in deficit, the non-government sector must — by definition — be in surplus. And vice versa.

She notes, correctly, that when government finances are described in this way, the deficit becomes less of a bogeyman. Ontario’s government, for instance, may face an $8.5 billion deficit. But that means Ontario’s non-government sector, otherwise known as the private economy, holds an $8.5 billion surplus.

And what’s so bad about that?

Kelton’s answer is that you have to look at the specifics of each case to determine whether a government deficit is beneficial or harmful. If the surplus held by the private economy is spent on say, useful infrastructure or measures to reduce inequality, then it could be considered worthwhile.

If by contrast the economy is at full capacity, a private-sector surplus could lead to inflation — in which case the government should reduce or eliminate its deficit.

How would government pay for prolonged deficits? It would get the money by selling securities to the central bank in exchange for cash.

These days the preferred term for this kind of activity is quantitative easing. Kelton sighs but agrees when I point out that this essentially means printing money.

Critics say that printing money can only result in hyperinflation. Kelton argues, following Keynes, that inflation is more likely to result from bottlenecks in the real economy than from an excess of cash. She says even Germany’s famous hyperinflation of the 1920s resulted not from an overactive central-bank printing press but from constraints imposed by the victors of World War I on the country’s productive capacity.

It’s understandable that non-orthodox economists like Kelton are coming to the fore. With a few notable exceptions, conventional economists failed to anticipate the 2008 financial meltdown and the subsequent Great Recession. New answers are being sought.

As a result, there are any number of so-called post-Keynesian schools. As University of Ottawa economist Marc Lavoie pointed out in a 2011 online paper, the horizontalists, circuitists and neo-chartalists don’t always get along.

But, like Kelton, they are trying to understand an economy that, for most people, just doesn’t work.

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